Motley Fool Hidden Gems Investing - Icahn Gets His Way

Episode Date: June 12, 2023

Carl Icahn gets what he was after as Illumina’s CEO steps down but what does this mean for the company’s potential big acquisition? (00:21) Jason Moser and Deidre Woollard discuss: - If Illumina’s CEO’s exit will impact the company’s moves to acquire Grail. - Carl Icahn’s history of activist investing. - Thoma Bravo’s success in buying companies and repackaging them for sale. (14:37) Ricky Mulvey interviews Anjay Nagpal, host of the podcast “Brokers, Bagmen, and Moles” about the curious history of the Chicago Mercantile Exchange and its ramifications on today’s investing universe. Companies discussed: ILMN, IEP, NDAQ, MSFT, ATVI Host: Deidre Woollard Guests: Jason Moser, Ricky Mulvey, Anjay Nagpal Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

I saw my friend on the other side of the street. I was heading to school with the kids. I let go of mom's hand to wave. I had already forgotten their lunches. I ran over to hug her. She came out of nowhere. And then... It stopped.

Sometimes the moments that never happen matter most. Volvo's Automatic Emergency Braking helps ensure a safe ending for everyone. Learn more at volvocars.ca slash safety. Welcome to Motley Fool Money. I'm Deidre Willard. I'm joined in studio by Motley Fool analyst Jason Moser. Hi, Jason. How are you doing today? Hey, doing great. How are you? Doing good. Well, I feel like one of the time-honored PR techniques is you kind of sneak out news on a Sunday night. We got one of those last night with the news that Illumina's

CEO, Francis D'Souza, he stepped down. Illumina, they're a biotech company. They're focused on genetic testing. D'Souza, he's kind of been through it the last few months, really. He's been the subject of this activist attack from Carl Icahn, which he outlasted over the Grail acquisition. Not the first time we've seen a CEO go through something like that and step down. Was this the case of him just outlasting that and then choosing his own moment to exit? It's possible. This has been quite the soap opera, though. Ultimately, you see what's going on here from the inception of this acquisition, buying back this company that they spun off. It does seem like there's a level of hubris that came with Mr. D'Souza that could have

backfired on him. When you go through a deal like this, and regulators voice concerns, and you go ahead through with the deal, you close everything, you go against regulators' wishes. They just thumbed their nose at regulatory concerns there. I just don't feel like that's good for business. It feels like you're not necessarily in the position to be making those calls. I mean, this is a big deal. It was an $8 billion acquisition, Illumina a $30 billion market cap. It was relatively large in the context of the business itself. Maybe this was a matter of him choosing the right time to get out, but it sure does seem like the activism was not playing in his favor. Again, I go back to that word, hubris.

It feels like there was a level of hubris involved with this decision that probably backfired on him. Could it have swayed things had he just taken a little bit more of a conciliatory tone or exercised some patience? Maybe. I don't know. But it does feel like the regulatory concerns were justified in potentially putting Illumina in a position where competitors really wouldn't have an opportunity to compete fairly with them. Yeah. And it was interesting to see, immediately after the news came out, Icahn went to Twitter. He was sort of declaring victory. Then you had D'Souza. He was on LinkedIn talking about how he still believes the Grail deal will go through. So, definitely had that soap opera element to it. So, let's talk about the Grail

deal. This was what really had Icahn so upset. It's this cancer detection test. It's the former subsidiary, as he mentioned. FTC said it was going to stifle competition. Illumina appealed. That was still going on. D'Souza, in that LinkedIn post, he was very much saying he still feels like this is good for the company, even though, of course, he no longer has a say in that. What happens next? That's a good question. It does feel like there are some tones here, save the hubris, I guess. I would say it does feel like there's some tones here of Microsoft and Activision Blizzard, and then, this has been going on for a while. It's really tough to try to figure out exactly what the endgame is or what's

going to happen. But it does seem like the signs are pointing to where this is not happening. I don't know that D'Souza stepping down makes any difference. I'm sure there's probably someone on the regulatory side that's maybe saying, I told you so. I don't know. I don't know that this is a matter of having a different CEO or different leadership installed. Really, at the end of the day, this boils back. You look at the criticisms that Mr. Iacom lobbed up in regard to this deal, it was generally the feeling that they're overpaying, which they very well may have. Valuation is somewhat subjective.

But ultimately, this boils down to shareholders. It was felt that this is not a shareholder-friendly deal, this is not something that really plays into a shareholder's favor. Regardless, the CEO, I don't know that that really changes the dynamic of this deal. Ultimately, it does go to the risks of growth via acquisition. Illumina is a company that's run into a little bit of headwinds there in regard to growth. Acquisition is one way you get past that. In this case, it doesn't look like this acquisition is going to work. Then you have to go back to the drawing table and feel like, what exactly are we going to do to spur that growth? I don't know that this deal is going to happen.

I don't think change in leadership makes a difference. Interesting. I want to dive into that a little bit more, the idea of what happens when a deal like this, as you said, has been going on for so long, both companies highly engaged in it. Now, if they go off in their different directions, maybe does Illumina look for something else? Or do they try to grow without acquisition? And what does it mean for Grail? Yeah, well, I think that really depends on who fills Mr. DeSouza's role, right? I mean, new leadership will come in with new strategy. And so, it is a little bit of a waiting game to see exactly who does fill that role. And that will dictate, I think, a lot of how Illumina

is approaching these next few years. I mean, certainly, if they do look for additional acquisitions, they're going to have to be very thoughtful in regard to regulatory concerns. because it does feel like, not just in regard to Illumina, but it does feel like regulators are giving a lot of these deals a lot more scrutiny than they have been over the last several years. Maybe that is a little bit of a changing of the narrative there going forward, not just for Illumina, but for companies all over. Yeah. Certainly, we've seen that in biotech as well with, I believe it was Amogen and Horizon. Let's talk a little bit about Carl Icahn. He's such a fascinating figure to me. There was that

HBO documentary about him recently, that Hindenburg short report that claimed, among other things, that Icahn is pumping up his dividend. He owns around 84% of the company. He doesn't take his dividend in cash, but it's got an attractive dividend yield. Since that report, the stock has been down dramatically. He's a fighter. Is he fighting too many things at once? It's possible. I would say probably so. But I think he likes that. I think he's doing what he really loves to do. He has a long activist history, for sure, and always seems to be in the headlines. There's no doubt, this stuff gets personal sometimes. I think that's really the biggest risk, beyond just spreading yourself too thin, which we see

often with leadership. They try to focus on doing too many things, and they don't do anything really terribly well. I wouldn't necessarily put Icahn in that position yet, but it does seem like some of this stuff gets a little bit personal for him. You go back through the years, look at some of the battles that he and Bill Ackman have waged. It's difficult for that stuff not to get personal at some level, because they just start lobbing attacks against each other. Investing at the end of the day really is just one big disagreement, right? You've got a buyer and a seller, and both parties think they're right. But I think that speaks to the greater risk in investing, not just for someone like Bill Ackman or Carl Icahn,

but for us. Emotions can be a real risk for investors. It's important to be able to find ways to keep those emotions in check, because they can make you make decisions that don't necessarily take the long-term into view. Yeah. He's very aggressive in his language, too, in the presentations that he makes and things like that. So, it always seems like he's got an ax to grind. Probably a little bit of hubris there, too. I think there are a lot of good lessons that come from it. We often talk about the way we invest vs. some of these things you see in the headlines. These folks are playing a different game. We're not playing the same game. Maybe there is an attitude and a level

of hubris that is required for what they're doing. But regardless, it can all lead to potentially bad decision-making, or at least some short-term focused decision-making, which oftentimes doesn't work out well. Yeah, it's true. Let's move on to some M&A news. We get those on Mondays, too. We've got Nasdaq acquiring Adenza. Adenza, if you've never heard of it, a lot of people haven't heard of it. Deal for $10.5 million. Adenza is actually a mix of two companies that were acquired by Toma Bravo, which is a private equity firm. It's Calypso and Axiom SL. Both of them are regulatory. One of them regulatory software, one for brokers, it seems, and one for the more banker's financial end.

Tell us a little bit more about what this deal means. Yeah, it's funny. We usually see this going the other way. The news is always that Toma Bravo is acquiring another one of our favorite software firms. I still remember the day they acquired L.A. May, and I was a little bit salty about that one. This is just an interesting combination. You go back to, what was it, 2020, Bravo acquired Axiom SL. Then in 2021, or it was around that same time, they acquired Calypso. But ultimately, they merged Calypso and Axiom SL to become Adenza. Adenza is a software firm that helps manage trading and risk management and post-trade processing along with technology that helps streamline reporting to regulators.

I think that's an important dynamic to the business. When you start bringing regulatory reporting, regulatory framework into the mix, that can become a little bit more of a competitive advantage, particularly in the world of finance. Again, it does feel like, while we normally see Bravo making the acquisitions, it's always interesting to see this news when they're actually selling something and realizing a bit of a return on their investment. It's interesting, too, because Toma Bravo, they pick up around 15% of NASDAQ in the deal because it's a cash and stock deal. That is absolutely significant as well. But really thinking about where NASDAQ is going, it seems to be in the middle of a push.

It's becoming maybe a back-end fintech provider. Is that necessary for NASDAQ if it wants to expand as a company to bring in these other aspects of a business? I think it's going to help. We talked earlier about just the risks of acquiring growth. But in this case, I think this is a nice, this is a complementary business. When you look at NASDAQ before this deal, NASDAQ, it's a very transaction-centric business. and that comes with a level of expenses. You can see that in their market platforms,

which make up the lion's share of the revenue before the transaction expenses. But once you back out those transaction expenses, it becomes more on par with their capital access side of the business. This is going to be something that helps diversify them away from that exposure to the transaction side of the business. Ultimately, I think that's a good thing. It's just a matter of whether they can make this integration seamless. That always is a risk that comes with acquisitions. But generally speaking, it seems like it's a complementary merger here for these two. Well, Toma Bravo, they're sort of fascinating because they've been really aggressive the

last couple of years. As you said, they've bought up some of the companies that we've liked. And they've also been doing this thing where they've been pairing up certain companies. We see this with this one. They did something similar with Magnet Forensics and Grayshift. They're combining that into a new company, still private for now. But does this deal shift that maybe Toma Bravo is now done with the acquiring and maybe starting to start selling off companies? What do you think might be happening here?

It's possible. But just given the nature of Bravo's business, this is what they do. As a PE firm, they have better than 75 portfolio companies today. They manage around $130 billion in assets. Because they specialize, they're so focused on the software side of the world. They have a level of expertise that they've really built throughout the years. They can see businesses that may make sense being together vs. businesses, perhaps, that are separated. You see them maybe making a couple of acquisitions, combining these businesses and creating a little bit more of a value proposition, a bit more of an attractive asset. If you look at the numbers, Bravo bought Calypso for around $3.7 billion.

They bought Axiom for around $2 billion. You look at this acquisition today, they're selling for around $10.5 billion. Clearly, that's a nice return on that investment in a very short period of time. I think you attribute that partly, at least, just to their expertise in this space. Kind of the nature of their business model, you find attractive assets at attractive prices, you have a strategy in place, you buy them. At some point, they want to realize that investment, realize the gain on that investment one way or the other.

selling these for more than they bought them is a nice value proposition for Bravo as well. You rinse and repeat, right? Right, yeah. Who doesn't love doing things like that? Do you think that there's more software acquisitions in their future? It seems like it's still a good time to be buying. A lot of companies, they can't get a lot of venture capital. They can't really go to the IPO market right now. We're still in that weird space. Is this still an active, fertile place for them to be hunting? I would imagine it is. I mean, I would imagine with the way, I mean, obviously, I guess, technically, we've entered a new bull market. It doesn't really feel that way, though, does it?

No, not yet. Maybe we can wait and see if this really lasts. But I think that there are still plenty of valuations out there that certainly look a lot more attractive than they did just a few years ago. In that regard, I would imagine they are absolutely taking a very close look at a number of businesses. It seems like they're going to have a nice little cash infusion here very soon, where they'll be looking to put some more of that money to work. So, I would not be surprised to see them making an announcement of an acquisition or two here before the year's end. Makes sense. Thanks for your time today, Jason.

Thank you. Even if you don't trade options, stock investors still feel their waves. Anjay Nagpal is the host of the podcast Brokers, Bagmen, and Moles about the birth of financial futures and a little-known FBI investigation at the Chicago Mercantile Exchange. Can you set up the era of the Merc before financial futures were even trading there? The Chicago Mercantile Exchange and the Board of Trade, they started out as agricultural exchanges. And I mean, literally where farmers in the 1800s would go to exchange crops, to buy and sell crops and livestock and things like that. Then over time, instead

of actually trading the animals and the crops, they started trading futures on those things. That was the very short version of how these exchanges came to grow into the behemoths that they were. There's a key figure that you cover in your show, Leo Melamed, who has this idea to move the center of finance out of New York City. Something that was surprising to me was that on Wall Street, they didn't want to do the options for financial instruments like stocks and mutual funds, where you could bet on the future price of a security. Yeah. Leo Malamed is really the single person. He's known as the godfather of futures. We tell a great story in one of our episodes about him, where he had this idea to

to create futures, not just on agricultural products, but on financial ones. And that really spurred the massive growth of the exchanges in the 80s. And it was a study that he commissioned by Milton Friedman that actually convinced his fellow exchange executives and other people to allow him to do that. So, it's a really fascinating story. Yeah. One part of that story that I found interesting is that he faced a lot of pushback in bringing these financial instruments to exchanges, which would be, for me at least, unexpected for Wall Street or Chicago. Yeah. You know what? Look, I think no matter what industry you're in, there's people that are a little bit afraid of innovation and

a little bit afraid of evolution. But Leo is definitely a forward thinker. But he got his point across. I want to get into some of the trading itself, because you talked to some people who knew Leo. You would think a guy like this would be an excellent trader because he set up the game. While you met many traders who might have had an edge in somewhat savory and unsavory ways, Leo didn't necessarily have an edge trading securities on the game that he created. First and foremost, all the information about trading is anecdotal. We haven't obtained any trading records for him, but it's anecdotal from a lot of people. We can infer that that was the case, that he didn't make a lot of

money trading at all. In fact, quite the opposite of what we heard many times. But the other thing that says about him is that he wasn't taking advantage of his position. He wasn't getting inside information from D.C. as was accused or rumored to be accused around this time. He was a gambler, was a trader, traded a lot, apparently. Like you said, creating the products didn't help him. As your listeners know, the market is hard, and it doesn't favor anyone. But the thing that really seemed to work to his disadvantage was that he was very emotional about his trades. Yeah, that's the story we heard from several of his former employees. I think Warren Buffett

definitely is the embodiment of the opposite side of that coin, who will tell you not to get emotional. If you're a trader or an investor, I think one thing you really have to think about is your edge. One trader you spoke with was Luis Bolsellino. He said that his edge was temperament, the ability to stay calm when others were panicking. Do you think that was the most important edge for a lot of these traders? What were the edges that you encountered in reporting your show? Certainly. Staying calm while others are panicking is very important. I've experienced that myself. Many great traders will tell you that. There are certain other characteristics that make someone a great trader. Especially

on those exchanges, though, the set of skills that you needed to be a good trader on the floor of the exchanges is very different than the set of skills needed now. We could talk about that in a second. But at the time, it was really almost like being a good poker player. You had to know how to read the room. For example, if you're standing next to a big broker and he gets some really big order, his eyes might go wide, or he might get a little nervous, or he might start looking at his biggest local traders that he's going to trade with. You can pick up on, oh, this guy's got something. There's an order coming into the pit, and it looks like it's going to be a big one. And you also can keep track of things. So, if Goldman Sachs came in and bought a bunch

of futures in the S&Ps, well, now that they're long and at some point they're going to probably unload those. So, keeping in mind which customers have what positions is also another one. But just really thinking fast, reacting fast, reading a room, and being incredibly aware of your surroundings is what made Lewis a great trader and what made a lot of people great traders on the floor of the exchange. Yeah, it seemed to be that ability to process a lot of information at the same time. That would be information that someone who's outside of the trading floor wouldn't necessarily have. You can see how the game changes a little bit. You were a trader at the Merck from 2000 to 2005. How did you see

that trading change throughout your career? Then we can get to how it continues to change today. Yeah. I was there during a time of great transition. I traded options rather than futures. Options are really complex. The pricing of options is an art and a science that involves understanding calculus and multivariable calculus at that. Trading evolved a lot during those years, because, first of all, they were starting to go electronic. At least, trades were being entered, as opposed to being written by hand on a card. They were now being entered into little computers and memorialized instantly. That's a big part of what was wrong at the Merck and the Board of Trade for so long.

It was hard to create an audit trail for a trade, because the rules said that you had to hand in these trading cards of what you did at the end of the day, and that time period kept getting shorter. So then it was 15 minutes, and then it was a few minutes, and then it was pretty instantaneously, which makes sense. You want to get those. If you're going to be able to regulate a trading floor like that and open outcry trading, you have to have an audit trail. You can't just hand in a bunch of cards at the end of the day and expect nobody to take advantage.

What exactly was the FBI looking for on the floor of the Chicago Mercantile Exchange? What they claimed was that they were trying to catch brokers stealing from their customers. That was the claim, but what we reveal in our show, if you get to the last few episodes, is that they were actually there for more than that. When it comes to brokers stealing from their customers, it's a really hard thing to prove, because there's so much happening at once on the trading floor. So trying to trace trades by sitting next to someone and having a tape recorder in your pocket is really hard, and it was hard to prove in court.

So there's a lot of dynamics that made it just such a fascinating investigation. But the gist of it is, hey, these guys are taking orders, and they're, in a variety of ways, ripping off their customers and giving some profits to people around the pit and then splitting the difference with them and pocketing money that is being stolen from customers. So take us to the floor. What's it look like to go undercover as an FBI agent trying to look for these bad actors fixing trades? It wasn't until I actually sat down and talked to the FBI that I really developed a lot of admiration for how hard their job was. They didn't always design the investigation. They didn't prosecute it. Their job was just

to go down there and fit in, and that was probably the hardest part of their job, is to fit in, because, you know, Chicago's episode number one of our show is called The Biggest Small Town in the World, and so a lot of the people that were at the Board of Trade and the Mercantile Exchange, they kind of knew each other, or they knew of, you know, they had some relatives common, or they had some commonality, so these four FBI agents had to go undercover and pretend like they belonged. And that in and of itself was hard. Then they had to learn futures trading. That's hard. And then they had to gain the trust of a crooked broker who wanted to use them as a bag man to park money that they would later rip off from the customer

and later on split. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.